If you’re checking in on your portfolio holdings every day–or worse yet, throughout the day–you may be tempted to trade more than you need to. In turn, you may run up high tax and transaction costs, and you’re also more likely to chase hot-performing stocks and funds in the hope that they’ll continue to outperform. That can be a recipe for disaster. In fact, when it comes to investing the truth is: Activity (trading) = Loss of Control and Worse Performance. So don’t do it!
Many of the basic rules of investing are counterintuitive. For example, rising interest rates may be good news for those shopping for CD’s and other short-term savings vehicles, but they’re generally bad for bond funds. And here’s another zinger: The lazy investor is often more successful than the hard-working one.
Because it is possible to shoot yourself in the foot with overzealous trading, I’m a big proponent of conducting a portfolio review just a few times a year–semiannually or quarterly. The purpose of this portfolio checkup is to systematically troubleshoot problem spots and identify changes you may want to make as part of your rebalancing program. (You should plan to rebalance your portfolio–remove money from those investments that have performed well and plow it into your portfolio’s underachievers–at least every few years.)
Observe the following five steps as you conduct a portfolio review. Take notes as you go along. You can always get a profession free portfolio checkup by contacting us here.
1. Make sure your asset mix is in line with your targets.
One of the most important determinants of whether your portfolio is positioned to meet your goals is your asset allocation–how much you hold in stocks, bonds, and cash.
2. Analyze your portfolio positioning.
Once you’ve assessed your portfolio’s asset allocation, turn your attention to how your stock and bond holdings are positioned.
3. Review your individual holdings and have a purpose.
Once you’ve checked out your aggregate portfolio’s positioning, it’s time to conduct a quick checkup on each of your individual holdings. (Cash, stocks, bonds, annuities, etc.) Ask yourself: “What is the purpose of this money?” Then find the investment that solves that purpose.
4. Examine performance.
It’s a big mistake to focus too much attention on short-term performance, but your quarterly or semiannual portfolio review should include a quick assessment of what is going on.
5. Rebalance your portfolio
After you’ve reviewed your portfolio’s current status, it’s time to plan your next move. It’s not likely that you’ll uncover a portfolio problem you need to address right away, but you should make sure your portfolio is rebalanced quarterly – if needed.
Simply put – this is usually way too much for the average investor. Not only is it confusing, but most people don’t have the tools to make this happen. This is part of our overall service we provide to our investing clients.
Does your investing and planning mean a lot to you? Then get your FREE portfolio checkup for 2012. Contact us right away!
About Michael Stokes